This paper investigates the effects of debts and budgetary deficit
on real variables using structural Vector Error Correction Model
(VECM) method with long-run restrictions. We compare our estimates
of the impulse responses with those based on levels Vector
Auto-Regressive (VAR) with standard recursive order restrictions.
The test is conducted on the Malaysian data covering the period of
1962-2006. The empirical results do not support the existence of
Ricardian Equivalence hypothesis. The effects of budgetary deficit
and government spending have a significant influence on private
consumption and private investment
